3 reasons to avoid buying ANZ Banking Group

Australia and New Zealand Banking Group (ASX: ANZ), or ANZ, is a great big bank.

Its focus on Asia and relatively small market share of Australian banking (compared to its peers) are two reasons why it could be the best pick of our big four banks. In the past 12 months alone ANZ shares have risen over 21%, trumping the S&P/ASX 200’s (ASX: XJO) (^AXJO) return of just 10%.

However ANZ, like the other banks, has a number of alarming trends and valuation metrics emerging, which potential investors will have to overlook in order to justify buying its shares. Here are three trends which are, quite frankly, the reasons I’m not buying ANZ shares today.

1. ANZ shares are at an all-time high. If that doesn’t make investors stop and think, it’s hard to imagine what will because, fundamentally, the reason we get into the stockmarket is to buy low and sell high. Not the other way around. Currently ANZ trades above its 10-year annual average price-earnings ratio and its price to book ratio is a massive 2.06.

2. Bad debts are falling. Although this isn’t as obvious as the first reason it could prove to be as important in the near future.

3. When interest rates drop (as they have in the past three years) bad debts fall because repayments are easier to make, this boosts profits in the short term. In addition, in a low interest rate environment money shifts from term deposits and savings accounts into high-yielding blue-chip stocks like our big banks, telcos and supermarket giants.

However when interest rates inevitably rise, bad debts will rise (dragging on profits) and term deposits will once again become more attractive, relative to shares. For me, it’s hard to imagine ANZ’s current share price getting through the interest rate cycle at the same levels it is today.

Here's what I'm doing instead

Instead of buying into ANZ at current prices, I'm looking for other high-yielding companies which will grow in any interest rate environment but those whose shares are also dirt cheap. One stock I'm strongly considering buying is The Motley Fool's #1 stock pick for 2014. Get it FREE in our newly updated investment report. It's yours FREE. Simply click here for your copy of "The Motley Fool's Top Stock for 2014."

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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